Lawyers, Advocates and Small Law Firm's Profit and Loss Statement | Basic Accounting | 30th October, 2020 |

If you’re a solo or small firm lawyer, you not only have to worry about your clients and cases, but also need to maintain books of account yourself.

You have to keep track of profits and losses, revenue flow, accounts payable/receivable, return on investments and other financial indicators that determines the health of your practice.

In a small practice, it’s easy to let these things slide. You don’t have the time Or you’re more interested in the handling work of the law.

But without some basic business accounting, 

• You won’t have an accurate picture of how you’re doing. 
• You won’t know if your firm is trending in the right direction. 
• You won’t know how to best allocate resources, cut expenses or leverage your personnel to grow your business.

If you’re fortunate, you have someone in-house who takes care of the bookkeeping and accounting, or if you have budgeted for outsourcing these duties. 

Even then also, you have to be able to read and understand the reports. And if something is overlooked or mismanaged, it’s you who will likely have to pay the price.

A law firm's profit and loss statement is upto some extend very similar to any other business's Profit & Loss statement. 

The primary differences are the sources of revenue and the types of expenses shown. 

P&L or income statement shows how your money comes in and how it goes out.

For small law firms that use the cash method of accounting, for revenue or billings, the profit & loss statement only shows the actual cash the law firm collected from its clients. Expenses are also documented as they are paid, not billed. 

In Cash method, Revenues and Expenses are recognized at the time they are actually received or paid. Cash method is usually limited to small businesses in the service industry that has no inventory.

Revenue is the income you gain from conducting business within your firm. There are two types of revenue. One is Gross Revenue and the other is Net Revenue. It is also commonly known as Gross Income and Net Income. Your income is the overall amount of money you take in as a result of serving your clients.

Gross Income – Total Expenses = Net Income

Lawyers book's revenues as hourly fees, fixed fees for services rendered or retainers against future services. These are typically referred to as billings. Some Advocate or lawyers book fees on a commission basis as a percentage of a judgement or damages. 

Expenses

Expenses means your business/profession expenses which include the costs of running your profession such as internet, phone, software fees, electricity, etc.

To recognise any expense as your business or profession related expense is to ask yourself, would I still have this expense if I didn’t have this particular office?

Salary Expense: If you have staff, you know that salaries are just one part of the true cost of employing people. You need to think hard about all the other ways you spend money on your staff i.e. tea and snacks expenses of your staff should be included in Tea and Refreshments Expenses. 

Rent Expenses: For most firms, this is the second-largest ongoing expense. Don’t forget the other expenses you incur as a result of being in your particular space. Perhaps you have to pay the parking expenses separately for employee parking. Do you might have a Generator service, a plant service, utilities? Include them also. 

Advertising and Promotion: If you're doing this expenses then you need to look this as category wise. Some of the categories are Print Media (newspapers) ads, Social Media advertisement, Banner advertisements and etc.. 

Vehicle related Expenses: Record where, when, and why you used the vehicle for business, and then apply the percentage of use to vehicle-related expenses. Subcategories this to split out parking expenses and tolls, which are deductible at 100% percent.

Paper Expenses: This majorly includes Zerox expenses, Stationary Expenses, Postages and Stamps Expenses etc...

General and Administrative: This broad category captures all the costs you incur in the running of your business that cannot be neatly presented into one of the other categories.

Here is the Illustrative list of Expenses generally incurred in Law Form: 

Expenses List:

(1) Office rent

(2) Electricity expenses

(3) Internet Expenses

(4) Software subscription Expenses

(5) Advertising exps

(6) Salary to staff

(7) Stationary expenses

(8) Zerox & Paper expenses

(9) Postages expenses

(10) Repairs & Maintenance

(AC, Bike, Printer, PC)

(11) Telephone expenses

(12) Petrol expenses

(13) Website expenses

(14) Insurance expenses

Assets – Liabilities = Owners’ Equity

Assets: An asset is any tangible or intangible item of value that your business owns. For example, tangible assets include vehicles while intangible items include intellectual property.

Owner's equity: Owner's equity means your own investment in the business or profession.

For Return filing for Professionals, you can read my earlier blog written on:

Lawyers, doctors, engineers and other professionals can take benefit of presumptive scheme of taxation | Sec.44ADA of Income Tax Act |

Click here to read this blog

Disclaimer: 

The above article is meant for informational purpose only and does not purport to be advice or opinion, legal or otherwise, whatsoever. While due care has been taken during the compilation of this article to ensure that the information is accurate to the best of our knowledge and belief, the contents of such article do not substitute for professional advice that may be required. The individual expressly disclaims all and any liability to any person who has read this document or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this article.